Thought Leadership

Indian SME sector: Opportunities and Challenges

The Importance of SME's in the Indian Economy

Dun & Bradstreet’s research suggests that there are 81 mn economic entities in the country (excluding entities involved in crop, public administration and defense). Many of them are single-person units operating from huts in villages, non-permanent structures etc. Excluding these entities, there are over 27 mn entities which we term as ‘commercially visible’. MSMEs account for around 99.9% of these 27 mn entities, they contribute to 35% of India’s GDP and employ 25% of India’s non-farm workforce.

D&B’s research on MSMEs across countries suggests that most entities evolve from micro to small to medium and (sometimes) large entities. Therefore, at any point in time you expect to see a distribution of these entities across the spectrum, from micro through to large. In developed markets, around 50% of the entities are micro and 40% are small/medium. In India, over 95% of total entities are micro and 4% are small/medium. The optics of the India distribution shows a gap, which economists refer to as ‘The Missing Middle’. The reason is that Indian micro enterprises are finding it difficult to scale up and grow into small and medium sizes. So what holds them back? Why do they struggle to scale up? Have their problems changed over time?

For over a decade D&B India has done an annual survey of MSMEs to understand the issues and challenges that they face. The library of responses we have compiled now covers thousands of MSMEs and several years, but the problems they cite have not changed. There are four deficiencies they cite: access to finance, availability of adequate infrastructure, availability of skilled labour and inadequate power supply.

It is our view at D&B that of these, ‘Access to finance’ is the most critical challenge. In other markets like Indonesia, Philippines, China, Malaysia, USA, Sri Lanka and Vietnam, an average of around 21% of MSMEs have access to formal sources of finance. The corresponding number for India is just 4%. Closing this gap can unlock huge potential for the Indian micro enterprises. The minority of Indian micro enterprises that do have access to external finance report 19% Return on Capital Employed compared to only 2% for micro enterprises that do not have access. This is a huge opportunity for lenders: the higher profitability can be shared with lenders to serve debt which in turn can be at higher interest rates. In other words, this is an MSME problem that can be solved, and profitably.